ECONOMICS AND
CAPITALISM

By George
Reisman**

PART A. THE
NATURE AND IMPORTANCE OF ECONOMICS

1.
Economics, the Division of Labor, and the Survival of Material Civilization

Economics
has been defined in a variety of ways. In the nineteenth century it was typically defined
as the science of wealth or of exchangeable wealth. In the twentieth century, it has
typically been defined as the science that studies the allocation of scarce means among
competing ends.1

I define economics as the science that studies the
production of wealth under a system of division of labor, that is, under a system in
which the individual lives by producing, or helping to produce, just one thing or at most
a very few things, and is supplied by the labor of others for the far greater part of his
needs. The justification of this definition will become increasingly clear as the contents
of this book unfold.2

The importance of economics derives from the specific
importance of wealthof material goodsto human life and well-being. The role of
wealth in human life is a subject that will be examined in Chapter 2 of this book, but
provisionally its importance can be accepted on a common-sense basis. Obviously, human
life depends on food, clothing, and shelter. Moreover, experience shows that there is no
limit to the amount of wealth that practically all civilized men and women desire, and
that the greatest part of their waking hours is actually spent in efforts to acquire
itnamely, in efforts to earn a living.

Yet the importance of wealth, by itself, is not sufficient
to establish the importance of economics. Robinson Crusoe on a desert island would need
wealth, and his ability to produce it would be helped if he somehow managed to salvage
from his ship books on various techniques of production. But it would not be helped by
books on economics. All that books on economics could do for Crusoe would be to describe
abstractly the essential nature of the activities he carries on without any knowledge of
economics, and, beyond that, merely to provide the possible intellectual stimulation he
might feel as the result of increasing his knowledge of the society from which he was cut
off. Something more than the importance of wealth is required to establish the importance
of economics.

As Chapter 4 of this book will show, the production of
wealth vitally depends on the division of labor. The division of labor is an essential
characteristic of every advanced economic system. It underlies practically all of the
gains we ascribe to technological progress and the use of improved tools and machinery;
its existence is indispensable for a high and rising productivity of labor, that is,
output per unit of labor. By the same token, its absence is a leading characteristic of
every backward economic system. It is the division of labor which introduces a degree of
complexity into economic life that makes necessary the existence of a special science of
economics. For the division of labor entails economic phenomena existing on a scale in
space and time that makes it impossible to comprehend them by means of personal
observation and experience alone. Economic life under a system of division of labor can be
comprehended only by means of an organized body of knowledge that proceeds by deductive
reasoning from elementary principles. This, of course, is the work of the science of
economics. The division of labor is thus the essential fact that necessitates the
existence of the subject of economics.3

Despite its vital importance, the division of labor, as a
country's dominant form of productive organizationthat is, a division-of-labor
societyis a relatively recent phenomenon in history. It goes back no further than
eighteenth-century Britain. Even today it is limited to little more than the United
States, the former British dominions, the countries of Western Europe, and Japan. The
dominant form of productive organization in most of the worldin the vast interiors
of Asia, Africa, and most of Latin Americaand everywhere for most of history, has
been the largely self-sufficient production of farm families and, before that, of tribes
of nomads or hunters.

What makes the science of economics necessary and
important is the fact that while human life and well-being depend on the production of
wealth, and the production of wealth depends on the division of labor, the division of
labor does not exist or function automatically. Its functioning crucially depends on the
laws and institutions countries adopt. A country can adopt laws and institutions that
make it possible for the division of labor to grow and flourish, as the United States did
in the late eighteenth century. Or it can adopt laws and institutions that prevent the
division of labor from growing and flourishing, as is the case in most of the world today,
and as was the case everywhere for most of history. Indeed, a country can adopt laws and
institutions that cause the division of labor to decline and practically cease to exist.
The leading historical example of this occurred under the Roman Empire in the third and
fourth centuries of the Christian era. The result was that the relatively advanced
economic system of the ancient world, which had achieved a significant degree of division
of labor, was replaced by feudalism, an economic system characterized by the
self-sufficiency of small territories.4

In order for a country to act intelligently in adopting
laws and institutions that bear upon economic life, it is clearly necessary that its
citizens understand the principles that govern the development and functioning of the
division of labor, that is, understand the principles of economics. If they do not, then
it is only a question of time before that country will adopt more and more destructive
laws and institutions, ultimately stopping all further economic progress and causing
actual economic decline, with all that that implies about the conditions of human life.

In the absence of a widespread, serious understanding of
the principles of economics, the citizens of an advanced, division-of-labor society, such
as our own, are in a position analogous to that of a crowd wandering among banks of
computers or other highly complex machinery, with no understanding of the functioning or
maintenance or safety requirements of the equipment, and randomly pushing buttons and
pulling levers. This is no exaggeration. In the absence of a knowledge of economics, our
contemporaries feel perfectly free to enact measures such as currency depreciation and
price controls. They feel free casually to experiment with the destruction of such
fundamental economic institutions as the freedom of contract, inheritance, and private
ownership of the means of production itself. In the absence of a knowledge of economics,
our civilization is perfectly capable of destroying itself, and, in the view of some
observers, is actually in the process of doing so.

Thus, the importance of economics consists in the fact
that ultimately our entire modern material civilization depends on its being understood.
What rests on modern material civilization is not only the well-being but also the very
lives of the great majority of people now living. In the absence of the extensive
division of labor we now possess, the production of modern medicines and vaccines, the
provision of modern sanitation and hygiene, and the production even of adequate food
supplies for our present numbers, would simply be impossible. The territory of the
continental United States, for example, counting the deserts, mountains, rivers, and
lakes, amounts to less than nine acres per person with its present populationnot
enough to enable that population to survive as primitive farmers. In Western Europe and
Japan, the problem of overpopulation would, of course, be far more severe. Needless to
say, the present vast populations of Asia, Africa, and Latin America would be unable to
survive in the absence of Western food and medical supplies.

2.
Further Major Applications of Economics

Solving
Politico-Economic Problems

Apart from the very survival of a division-of-labor
society, and all that depends on it, the most important application of economics is to
provide the knowledge necessary for the adoption of government policies conducive to the
smooth and efficient functioning of such a society.5 On the basis of the
knowledge it provides, economics offers logically demonstrable solutions for
politico-economic problems. For example, it explains very clearly how to stop such major
present-day problems as inflation, shortages, depressions, and mass unemployment, and how
to turn capital decumulation into capital accumulation and a declining productivity of
labor into a rising productivity of labor. In addition, economics can very clearly show
how to achieve economic progress all across the world, and is potentially capable of
playing an enormous role in eliminating the intellectual and economic causes both of
domestic strife and of international conflict and war. As I will show, the essential
nature of the policies economics demonstrates to be necessary to solve all such problems
is respect for property rights and economic freedom.

Understanding
History

Because it explains what promotes and what impairs the
functioning of the division of labor, economics is an essential tool for understanding the
world's historythe broad sweep of its periods of progress and its periods of
declineand the journalistic events of any given time. Its applications include a
grasp of the causes of the decline of ancient civilization and of the rise of the modern,
industrial world, both of which can be understood in terms of the rise or fall of the
division of labor.

Economics brings to the understanding of history and
journalism a foundation of scientific knowledge which can serve historians and journalists
in much the same way as a knowledge of natural science and mathematics. Namely, it can
give to historians and journalists a knowledge of what is and is not possible, and
therefore a knowledge of what can and cannot qualify as an explanation of economic
phenomena. For example, a knowledge of modern natural science precludes any historical or
journalistic explanation of events based on Ptolemaic astronomy or the phlogiston theory
of chemistry, not to mention beliefs in such notions as witchcraft, astrology, or any form
of supernaturalism. In exactly the same way, it will be shown in this book that a
knowledge of economics precludes any historical or journalistic explanation of events
based on such doctrines as the Marxian theory of exploitation and class warfare, or on the
belief that machinery causes unemployment or that depressions are caused by
"overproduction."6

Economics can also serve historians and journalists as a
guide to what further facts to look for in the explanation of economic events. For
example, whenever shortages exist, it tells them to look for government controls limiting
the rise in prices; whenever unemployment exists, it tells them to look for government
interference limiting the fall in money wage rates; and whenever a depression exists, it
tells them to look for a preceding expansion of money and credit.7

Implications
for Ethics and Personal Understanding

Economics has powerful implications for ethics. It
demonstrates exhaustively that in a division-of-labor, capitalist society, one man's gain
is not another man's loss, that, indeed, it is actually other men's gainespecially
in the case of the building of great fortunes. In sum, economics demonstrates that the
rational self-interests of all men are harmonious. In so doing, economics raises a leading
voice against the traditional ethics of altruism and self-sacrifice. It presents
societya division-of-labor, capitalist societynot as an entity over and above
the individual, to which he must sacrifice his interests, but as an indispensable means
within which the individual can fulfill the ultimate ends of his own personal life and
happiness.8

A knowledge of economics is indispensable for anyone who
seeks to understand his own place in the modern world and that of others. It is a powerful
antidote to unfounded feelings of being the victim or perpetrator of
"exploitation" and to all feelings of "alienation" based on the belief
that the economic world is immoral, purposeless, or chaotic. Such unfounded feelings rest
on an ignorance of economics.

The feelings pertaining to alleged exploitation rest on
ignorance of the productive role of various economic functions, such as those of
businessman and capitalist, retailing and wholesaling, and advertising and speculation,
and on the underlying conviction that essentially only manual labor is productive and is
therefore the only legitimate form of economic activity.9 Feelings pertaining to
the alleged purposelessness of much of economic activity rest on ignorance of the role of
wealth in human life beyond the immediate necessities of food, clothing, and shelter. This
ignorance leads to the conviction that economic activity beyond the provision of these
necessities serves no legitimate purpose.10 Feelings pertaining to the alleged
chaos of economic activity rest on ignorance of the knowledge economics provides of the
benevolent role of such institutions as the division of labor, private ownership of the
means of production, exchange and money, economic competition, and the price system.

In opposition to feelings of alienation, economic science
makes the economic world fully intelligible. It explains the foundations of the enormous
economic progress which has taken place in the "Western" world over the last two
centuries. (This includes the rapid economic progress that has been made in recent decades
by several countries in the Far East, which have largely become "Westernized.")
And in providing demonstrable solutions for all of the world's major economic problems, it
points the way for intelligent action to make possible radical and progressive improvement
in the material conditions of human beings everywhere. As a result, knowledge of the
subject cannot help but support the conviction that the fundamental nature of the world is
benevolent and thus that there is no rational basis for feelings of fundamental
estrangement from the world.11

The above discussion, of course, is totally in opposition
to the widely believed claims of Marx and Engels and their followers, such as Erich
Fromm,
that the economic system of the modern worldcapitalismis the basis of
alienation. Indeed, it is consistent with the above discussion that the actual basis of
"alienation" resides within the psychological makeup of those who experience the
problem. Ignorance of economics reinforces feelings of alienation and allows the alleged
deficiencies of the economic system to serve as a convenient rationalization for the
existence of the problem.12

Economics
and Business

Despite popular beliefs, economics is not a science of
quantitative predictions. It does not provide reliable information on such matters as what
the price of a common stock or commodity will be in the future, or what the "gross
national product" will be in the next year or quarter.13

However, a knowledge of economics does provide an
important intellectual framework for making business and personal financial decisions. For
example, a businessman who understands economics is in a far better position to appreciate
what the demand for his firm's products depends on than a businessman who does not.
Similarly, an individual investor who understands economics is in a vastly better position
to protect himself from the consequences of such things as inflation or deflation than one
who does not.

But the most important application of economics to
business and investment is that only a widespread knowledge of economics can assure the
continued existence of the very activities of business and investment. These activities
are prohibited under socialism. In a socialist society, such as that of the former Soviet
Union, which is governed by the belief that profits and interest are incomes derived from
"exploitation," individuals who attempt to engage in business or investment
activity have been sent to concentration camps or executed. Business activities can endure
and flourish only in a society which understands economics and which is therefore capable
of appreciating their value. The value of economics to businessmen should be thought of
not as teaching them how to make money (which is a talent that they possess to an
incalculably greater degree than economists), but as explaining why it is to the
self-interest of everyone that businessmen should be free to make money. This is
something which businessmen do not know, which is vital to them (and to everyone else),
and which economics is uniquely qualified to explain.

Economics
and the Defense of Individual Rights

Knowledge of economics is indispensable to the defense of
individual rights. The philosophy of individual rights, as set forth in the writings of
John Locke and the Declaration of Independence and Constitution of the United States, has
been thoroughly undermined as the result of the influence of wrong economic theories,
above all, the theories of Karl Marx and the other socialists. The essential conclusion of
such theories is that in the economic sphere the exercise of individual rights as
understood by Locke and the Founding Fathers of the United States serves merely to enable
the capitalists to exploit the workers and consumers, or is otherwise comparably
destructive to the interests of the great majority of people. Precisely as a result of the
influence of these vicious ideas, culminating in the victory of the New Deal, the Supreme
Court of the United States has, since 1937, simply abandoned the defense of economic
freedom. Since that time it has allowed Congress and the state legislatures, and even
unelected regulatory agencies, to do practically anything they wish in this area, the
Constitution and Bill of Rights and all prior American legal precedent notwithstanding.14

A thorough knowledge of economics is essential to
understanding why the exercise of individual rights in the economic sphere not only is not
harmful to the interests of others, but is in the foremost interest of everyone. It is
essential if the American people are ever to reclaim the safeguards to economic freedom
provided by their Constitution, or if people anywhere are to be able to establish and
maintain systems of government based on meaningful respect for individual rights. Indeed,
in demonstrating the harmony of the rational self-interests of all men under freedom, this
entire book has no greater or more urgent purpose than that of helping to uphold the
philosophy of individual rights.

* * *

The nature and importance of economics imply that study of
the subject should be an important part of the general education of every intelligent
person. Economics belongs alongside mathematics, natural science, history, philosophy, and
the humanities as an integral part of a liberal education. It deserves an especially
prominent place in the education of lawyers, businessmen, journalists, historians, the
writers of literary works, and university, college, and secondary-school teachers of the
humanities and social sciences. These are the groups that play the dominant role in
forming people's attitudes concerning legislation and social institutions and whose work
can most profit from an understanding of economics.

PART B.
CAPITALISM

This book shows that the laws and social institutions
necessary to the successful functioning, indeed, to the very existence, of the division of
labor are those of capitalism. Capitalism is a social system based on private
ownership of the means of production. It is characterized by the pursuit of material
self-interest under freedom and it rests on a foundation of the cultural influence of
reason. Based on its foundations and essential nature, capitalism is further characterized
by saving and capital accumulation, exchange and money, financial self-interest and the
profit motive, the freedoms of economic competition and economic inequality, the price
system, economic progress, and a harmony of the material self-interests of all the
individuals who participate in it.

As succeeding chapters of this book will demonstrate,
almost every essential feature of capitalism underlies the division of labor and several
of them are profoundly influenced by it in their own operation. When the connections
between capitalism and the division of labor have been understood, it will be clear that
economics, as the science which studies the production of wealth under a system of
division of labor, is actually the science which studies the production of wealth under capitalism.
Economics' study of the consequences of government intervention and of socialism will be
shown to be merely study of the impairment or outright destruction of capitalism and the
division of labor.

1. The
Philosophical Foundations of Capitalism and Economic Activity

Economic activity and the development of economic
institutions do not take place in a vacuum. They are profoundly influenced by the
fundamental philosophical convictions people hold.15 Specifically, the
development of capitalist institutions and the elevation of the level of production to the
standard it has reached over the last two centuries presuppose the acceptance of a this-worldly,
proreason philosophy. Indeed, in their essential development, the institutions of
capitalism and the economic progress that results represent the implementation of man's
right to life, as that right has been described by Ayn Randnamely, as the right
"to take all the actions required by the nature of a rational being for the support,
the furtherance, the fulfillment and the enjoyment of his own life."16
Capitalism is the economic system that develops insofar as people are free to exercise
their right to life and choose to exercise it. As will be shown, its institutions
represent, in effect, a self-expanded power of human reason to serve human life.17
The growing abundance of goods that results is the material means by which people further,
fulfill, and enjoy their lives. The philosophical requirements of capitalism are identical
with the philosophical requirements of the recognition and implementation of man's right
to life.

It was no accident that the gradual development of
capitalist institutions in Western Europe that began in the late Middle Ages paralleled
the growing influence of prosecular, proreason trends in philosophy and religion, which
had been set in motion by the reintroduction into the Western world of the writings of
Aristotle. It is no accident that the greatest era of capitalist developmentthe last
two centurieshas taken place under the ongoing cultural influence of the philosophy
of the Enlightenment.

Philosophical convictions pertaining to the reality and
primacy of the material world of sensory experience determine the extent to which people
are concerned with this world and with improving their lives in it. When, for example,
people's lives were dominated by the idea that the material world is superseded by
another, higher world, for which their life in this world is merely a test and a
preparation, and in which they will spend eternity, they had little motive to devote much
thought and energy to material improvement. It was only when the philosophical conviction
grew that the senses are valid and that sensory perception is the only legitimate basis of
knowledge, that they could turn their full thought and attention to this world. This
change was an indispensable precondition of the development of the pursuit of material
self-interest as a leading force in people's lives.

The cultural acceptance of the closely related
philosophical conviction that the world operates according to definite and knowable
principles of cause and effect is equally important to economic development. This
conviction, largely absent in the Dark Ages, is the indispensable foundation of science
and technology. It tells scientists and inventors that answers exist and can be found, if
only they will keep on looking for them. Without this conviction, science and technology
could not be pursued. There could be no quest for answers if people were not first
convinced that answers can be found.

In addition to the emphasis on this-worldly concerns and
the grasp of the principle of cause and effect, the influence of reason shows up in the
development of the individual's conceptual ability to give a sense of present reality to
his life in decades to come, and in his identification of himself as a self-responsible
causal agent with the power to improve his life. This combination of ideas is what
produced in people such attitudes as the realization that hard work pays and that they
must accept responsibility for their future by means of saving. The same combination of
ideas helped to provide the intellectual foundation for the establishment and extension of
private property rights as incentives to production and saving. Private property rights
rest on the recognition of the principle of causality in the form that those who are to
implement the causes must be motivated by being able to benefit from the effects they
create. They also rest on a foundation of secularismof the recognition of the
rightness of being concerned with material improvement.

Thus, insofar as production depends on people's desire to
improve their material conditions, and on science, technology, hard work, saving, and
private property, it fundamentally depends on the influence of a this-worldly, proreason
philosophy.

And to the extent that production depends on peace and
tranquility, on respect for individual rights, on limited government, economic and
political freedom, and even on personal self-esteem, it again fundamentally depends on the
influence of a this-worldly, proreason philosophy.

From the dawn of the Renaissance to the end of the
nineteenth century, the growing conviction that reason is a reliable tool of knowledge and
means of solving problems led to a decline in violence and the frequency of warfare in
Western society, as people and governments became increasingly willing to settle disputes
by discussion and persuasion, based on logic and facts. This was a necessary precondition
of the development of the incentive and the means for the stepped-up capital accumulation
required by a modern economic system. For if people are confronted with the chronic threat
of losing what they save, and again and again do lose itwhether to local robbers or
to marauding invadersthey cannot have either the incentive or the means to
accumulate capital.

During the same period of time, as part of the same
process, a growing confidence in the reliability and power of human reason led to the
elevation of people's view of man, as the being distinguished by the possession of reason.
Because he was held to possess incomparably the highest and best means of knowledge, man
came to be regarded, on philosophical grounds, as incomparably the highest and best
creature in the natural order, capable of action on a grand and magnificent scale, with
unlimited potential for improvement. In conjunction with the further philosophical
conviction that what actually exist are always individual concretes, not abstractions as
such, and thus not collectives or groups of any kind, the elevated view of man meant an
elevated view of the individual human being and his individual potential.

In their logically consistent form, these ideas led to a
view of the individual as both supremely valuableas an end in himselfand as
fully competent to run his own life. The application, in turn, of this view of the
individual to society and politics was the doctrine of inalienable individual rights, and
of government as existing for no other purpose than to secure those rights, in order to
leave the individual free to pursue his own happiness. This, of course, was the foundation
of the freedom of capitalism. The same view of man and the human individual, when accepted
as a personal standard to be lived up to, was the inspiration for individuals to undertake
large-scale accomplishments and to persevere against hardship and failure in order to
succeed. It inspired them when they set out to explore the world, discover laws of nature,
establish a proper form of government, invent new products and methods of production, and
build vast new businesses and brand new industries. It was the inspiration for the
pioneering spirit and sense of self-reliance and self-responsibility which once pervaded
American society at all levels of ability, and a leading manifestation of which is the
spirit of great entrepreneurship.

Finally, the ability of economic science itself to
influence people's thinking so that they will favor capitalism and sound economic policy
is also totally dependent on the influence of a proreason philosophy. Economics is a
science that seeks to explain the complexities of economic life through a process of
abstraction and simplification. The method of economics is the construction of
deliberately simplified cases, which highlight specific economic phenomena and make
possible a conceptual analysis of their effects. For example, in analyzing the effects of
improvements in machinery, an economist imagines a hypothetical case in which no change of
any kind takes place in the world except the introduction of an improved machine. The
truths established deductively in the analysis of such cases are then applied as
principles to the real economic world. Consequently, the ability of economics to affect
people's attitudes depends on their willingness to follow and feel bound by the results of
abstract reasoning. If economics is to have cultural influence, it is indispensable that
people have full confidence in logic and reason as tools of cognition.

* * *

Not only are economic activity and economics as a science
dependent on a proreason philosophy in all the ways I have described, but also it should
be realized that economics itself is a highly philosophical subject, potentially capable
of exerting an extremely important proreason influence on philosophy. As the subject that
studies the production of wealth under a system of division of labor, economics deals both
with essential aspects of man's relationship to the physical world and with essential
aspects of his relationship to other men. Indeed, the subject matter of economics can be
understood as nothing less than the fundamental nature of human society and the ability of
human beings living in society progressively to enlarge the benefits they derive from the
physical world. For this is what one understands when one grasps the nature and
ramifications of the division of labor and its effects on the ability to produce. In this
capacity, economics overturns such irrationalist philosophical doctrines as the notion
that one man's gain is another man's loss, and the consequent belief in the existence of
an inherent conflict of interests among human beings. In their place it sets the doctrine
of continuous economic progress and the harmony of the rational self-interests of all
human beings under capitalism, which doctrine it conclusively proves on the basis of
economic law.

2.
Capitalism and Freedom

Freedom means the absence of the initiation of physical
force. Physical force means injuring, damaging, or otherwise physically doing
something to or with the person or property of another against his will. The initiation
of physical force means starting the processthat is, being the first to use physical
force. When one has freedom, what one is free of or free from is the initiation of
physical force by other people. An individual is free when, for example, he is free from
the threat of being murdered, robbed, assaulted, kidnapped, or defrauded.

(Fraud represents force, because it means taking away
property against the will of its owner; it is a species of theft. For example, if a bogus
repairman takes away a washing machine to sell it, while saying that he is taking it to
repair it, he is guilty of force. In taking it to sell, he takes it against the will of
the owner. The owner gives him no more authorization to sell it than he gives to a
burglar.)

Freedom
and Government

The existence of freedom requires the existence of
government. Government is the social institution whose proper function is to protect the
individual from the initiation of force. Properly, it acts as the individual's agent, to
which he delegates his right of self-defense. It exists to make possible an organized,
effective defense and deterrent against the initiation of force. Also, by placing the use
of defensive force under the control of objective laws and rules of procedure, it prevents
efforts at self-defense from turning into aggression. If, for example, individuals could
decide that their self-defense required that they drive tanks down the street, they would
actually be engaged in aggression, because they would put everyone else in a state of
terror. Control over all use of force, even in self-defense, is necessary for people to be
secure against aggression.18

An effective government, in minimizing the threat of
aggression, establishes the existence of the individual's freedom in relation to all other
private individuals. But this is far from sufficient to establish freedom as a general
social condition. For one overwhelming threat to freedom remains: namely, aggression by
the government itself.

Everything a government does rests on the use of force. No
law actually is a law unless it is backed by the threat of force. So long as what the
government makes illegal are merely acts representing the initiation of force, it is the
friend and guarantor of freedom. But to whatever extent the government makes illegal acts
that do not represent the initiation of force, it is the enemy and violator of freedom. In
making such acts illegal, it becomes the initiator of force.

Thus, while the existence of freedom requires the
existence of government, it requires the existence of a very specific kind of government:
namely, a limited government, a government limited exclusively to the functions of
defense and retaliation against the initiation of forcethat is, to the provision of
police, courts, and national defense.19

In a fully capitalist society, government does not go
beyond these functions. It does not, for example, dictate prices, wages, or working
conditions. It does not prescribe methods of production or the kinds of products that can
be produced. It does not engage in any form of "economic regulation." It neither
builds houses nor provides education, medical care, old-age pensions, or any other form of
subsidy. All economic needs are met privately, including the need for charitable
assistance when it arises. The government's expenditures are accordingly strictly limited;
they do not go beyond the payment of the cost of the defense functions. And thus taxation
is strictly limited; it does not go beyond the cost of the defense functions.20

In short, in its logically consistent form, capitalism is
characterized by laissez faire. The government of such a society is, in effect, merely a
night watchman, with whom the honest, peaceful citizen has very little contact and from
whom he has nothing to fear. The regulations and controls that exist in such a society are
not regulations and controls on the activities of the peaceful citizen, but on the
activities of common criminals and on the activities of government officialson the
activities of the two classes of men who use physical force. Under capitalism, while the
government controls the criminals, it itself is controlled (as it was for most of the
history of the United States) by a Constitution, Bill of Rights, and system of checks and
balances achieved through a division of powers. And thus the freedom of the individual is
secured.21

Given the existence of government and its power to
restrain the private use of force, the concept of freedom must be defined in a way that
places special stress on the relationship of the citizen to his government. This is
because the government's capacity for violating freedom is incomparably greater than that
of any private individual or gang whose aggression it fights. One has only to compare the
Gestapo or the KGB with the Mafia, to realize how much greater is the potential danger to
freedom that comes from government than from private individuals. The government operates
through open lines of communication and has at its disposal entire armies that in modern
times are equipped with artillery, tanks, planes, rockets, and atomic weapons. Private
gangs number comparative handfuls of individuals, operating clandestinely and equipped at
most perhaps with submachine guns. Thus, freedom must be defined not merely as the absence
of the initiation of physical force, but, in addition, in order to highlight its most
crucial aspect, the absence of the initiation of physical force by, or with the sanction
of, the government. The very existence of government can easily secure the freedom
of the individual in relation to all other private citizens. The crucial matter is the
individual's freedom in relation to the government.

Freedom
as the Foundation of Security

It is important to realize that freedom is the foundation
of both personal and economic security.

The existence of freedom directly and immediately
establishes personal security in the sense of safety from the initiation of physical
force. When one is free, one is safesecurefrom common crime, because what one
is free of or free from is precisely the initiation of physical force.

The fact that freedom is the absence of the initiation of
physical force also means that peace is a corollary of freedom. Where there is
freedom, there is peace, because there is no use of force: insofar as force is not
initiated, the use of force in defense or retaliation need not take place. Peace in this
sense is one of the most desirable features of freedom. Nothing could be more valuable or
honorable.

There is, however, a different sense in which peace of
some sort can exist. Here, one person or group threatens another with the initiation of
force and the other offers no resistance, but simply obeys. This is the peace of slaves
and cowards. It is the kind of peace corrupt intellectuals long urged on the relatively
free people of the Western world in relation to the aggression of the Communist world.

Freedom is the precondition of economic security, along
with personal safety, because it is an essential requirement for individuals being able to
act on their rational judgment. When they possess freedom, individuals can consider their
circumstances and then choose the course of action that they judge to be most conducive to
their economic well-being and thus to their economic security. In addition, they can
benefit from the like choices of those with whom they deal.

Under freedom, everyone can choose to do whatever he
judges to be most in his own interest, without fear of being stopped by the physical force
of anyone else, so long as he himself does not initiate the use of physical force. This
means, for example, that he can take the highest paying job he can find and buy from the
most competitive suppliers he can find; at the same time, he can keep all the income he
earns and save as much of it as he likes, investing his savings in the most profitable
ways he can. The only thing he cannot do is use force himself. With the use of force
prohibited, the way an individual increases the money he earns is by using his reason to
figure out how to offer other people more or better goods and services for the same money,
since this is the means of inducing them voluntarily to spend more of their funds in
buying from him rather than from competitors. Thus, freedom is the basis of everyone being
as secure as the exercise of his own reason and the reason of his suppliers can make him.

The detailed demonstration of the fact that economic
freedom is the foundation of economic security is a major theme of this book. This book
will show, for example, that free competition is actually a leading source of economic
security, rather than any kind of threat to it, and that such phenomena as inflation,
depressions, and mass unemploymentthe leading causes of economic insecurityare
results of violations of economic freedom by the government, and not at all, as is
usually believed, of economic freedom itself.22

* * *

The harmony between freedom and security that this book
upholds is, of course, in direct opposition to the prevailing view that in order to
achieve economic security, one must violate economic freedom and establish a welfare
state. The existence of the social security system, in the United States and other
countries, both represents a leading consequence of this mistaken belief and provides
essential evidence about what is wrong with it.

In the name of economic security, the freedom of
individuals to dispose of their own incomes has been violated as they have been forced to
contribute to the social security system. A major consequence of this has been that an
enormous amount of savings has been diverted from private individuals into the hands of
the government. Had these savings remained in the possession of the individuals, they
would have been invested and would thus have helped to finance the construction and
purchase of new housing, new factories, and more and better machinery. In the hands of the
government, these savings have been dissipated in current consumption. This has resulted
from the fact that the government has an overwhelmingly greater interest in its own
immediate financial needs than in the future economic security of any private individuals
and thus has spent the funds in financing its current expenditures. This has meant the
dissipation of these savings and thus the serious undermining of the wealth and productive
ability of the entire economic system.23

These results have proceeded from the essential nature of
the case, which is that while private individuals have an interest in their long-run
future economic security, and will provide for it if they are left free to do so, the
government does not have such an interest. The interest of government officials is to get
by in their term of office and leave the problems of the future to their successors. Thus
the violation of economic freedom necessarily results in making individuals less
economically secure. Indeed, having been deprived of the existence of actual savings to
provide for their future economic security, individuals are now in the position of having
to depend on the largess of future legislators, who will have to turn to future taxpayers
for the necessary funds. This arrangement has much more in common with the gross
insecurity of living as a beggar than it has with any actual economic security.24

In opposition to all such delusions, this book shows that
to achieve economic security, the essential requirement is precisely economic freedom.

The
Indivisibility of Economic and Political Freedom

Although the emphasis of this book is necessarily on the
importance of economic freedom, this fact should not be taken in any way to mean a lack of
concern for political freedom. Economic freedom and political freedom are indivisible.
They are, in fact, merely different aspects of the same thing. The alleged dichotomy
between economic freedom and political freedom, between property rights and human rights,
is groundless. Virtually every human activity employs wealthproperty. To respect the
right and freedom to use property is to respect the right and freedom to carry on the
activities in which property is used. To deny the right and freedom to carry on such
activities is to deny the right and freedom to use the property involved.

For example, the freedom of speech is implied in a
farmer's right to use his pasture as he sees fit. The farmer's property rights include his
right to invite people onto his land to deliver and or hear a speech. Any effort by the
government to stop or prevent such a speech is an obvious interference with the farmer's
property rights. Property rights also include the right to build meeting halls and radio
and television stations and to use them to propound whatever ideas one likes. Freedom of
speech is fully contained in the economic freedom of the owners of property of the kind
that facilitates speech to use their property as they see fit. By the same token, the
freedom of speech of those who do not own such property is implied in their right and
freedom to buy the use of such property from those who do own it and are willing to rent it
to them. Government interference with any such speech is simultaneously an interference
with the property rights of the owners of meeting halls or radio or television stations to
use or rent their facilities as they see fit.

In the same way, freedom of the press is fully contained
in the freedom of an individual to set his type to form the words he wants to form, and
then to use his presses, paper, and ink to reproduce those words, and to sell the
resulting product to buyers of his choice. Freedom of travel is contained in the property
right to build railroads and highways, automobiles and airplanes, to drive one's
automobile where one likes, or buy a bus, train, or plane ticket from any willing seller.
It is contained in the freedom to use one's shoes to walk across the frontier.

In prohibiting the freedom of speech, press, or travel,
one prohibits property owners from using their property as they wish. By the same token,
in respecting property rights, one respects these freedoms. On this basis, one should
observe the irony of alleged conservative defenders of property rights advocating such
things as antipornography legislationa violation of the property rights of press
ownersand of alleged liberal defenders of civil liberties advocating the violation
of property rights.25

The
Rational Versus the Anarchic Concept of Freedom

The concept of freedom when employed rationally,
presupposes the existence of reality, and with it the laws of nature, the necessity of
choice among alternatives, and the fact that if one resorts to force, one must expect to
be met by force. Of particular importance is the fact that it presupposes the necessity of
having the voluntary cooperation of everyone who is to aid in an activityincluding
the owners of any property that may be involved. After taking for granted the presence of
all this, the rational concept of freedom then focuses on the absence of one particular
thing: the initiation of physical forcein particular, by the government.26

In sharpest contrast to the rational concept of freedom is
the anarchic concept. The anarchic concept of freedom evades and seeks to obliterate the
fundamental and radical distinction that exists between two sorts of obstacles to the
achievement of a goal or desire: "obstacles" constituted by the ordinary facts
of reality, including other people's voluntary choices, and obstacles constituted by the
government's threat to use physical force. For example, by the nature of things, it is
impossible for me to square circles, walk through walls, or be in two places at the same
time. It is also not possible for me, in the actual circumstances of my life, to win the
Nobel prize in chemistry or the Academy Award for best actor of the year, or to enter the
automobile or steel business. There are all kinds of such things I simply cannot do. And
among the things I could do, there are many I choose not to do, because I judge the
consequences to myself to be highly undesirable. For example, I cannot arbitrarily decide
to walk off my job in the middle of winter to take a vacation in the sun, without the very
strong likelihood of being fired. I cannot drive down a city street at ninety miles an
hour, nor can I strike or kill another, without running the risk of paying the penalty for
violating the law. And then, there are things that are possible for me to do, and that I
would very much like to do, but that would require the consent of other people, which
consent they are unwilling to give. In this category, are such things as having my views
published in The New York Times or having this book assigned in
courses at leading
"liberal" universities.

Absolutely none of these facts constitutes a violation of
freedom, a denial of rights, or anything of the kind. In order for a violation of freedom
to exist, it is not sufficient merely that someone be unable to achieve what he desires.
What is necessary is that the specific thing stopping him be the initiation of physical
force; in particular, the government's threat to use force against him in response to
an action of his that does not represent the use of force.

The stock-in-trade of the anarchic concept of freedom,
however, is to construe precisely such facts as a violation of freedom and rights. On the
basis of the anarchic concept of freedom, it is claimed that freedom is violated any time
there is anything that, for whatever reason, a person cannot do, from flying to the moon,
to being able to afford a house or a college education that is beyond his reach, to
committing murder.27

Ironically, the anarchic concept of freedom is implicitly
accepted by conservatives and fascists, as well as by anarchists and hippies. This is
evident in the arguments they advance when they seek to establish the principle that it is
necessary and proper to violate freedom. For example, they argue that we do not allow a
man the "freedom" to murder his mother-in-law or to speed through red lights and
thereby threaten the lives of others. In propounding such arguments, the conservatives and
fascists casually neglect the fact that such acts constitute the initiation of force, and
are so far from representing freedom that their prohibition is what actually
constitutes freedom.

The anarchic concept of freedom, of course, is present in
the assertions of Communists and socialists that their freedom of speech is violated
because they are threatened with arrest for attempting to disrupt the speech of an invited
speaker by shouting him down or by speaking at the same time. This assertion by the
Communists and socialists neglects the fact that their action constitutes the use of
someone else's property against his willnamely, the use of the meeting room against
the will of the owner or lessee, who wants the invited speaker to speak, not the
disrupters. It is thus the action of the Communists and socialists which is a violation of
freedom in this instancea genuine violation of the freedom of speech.

It follows from this discussion of the erroneous claims of
the Communists and socialists that a prohibition on arbitrarily shouting "fire"
in a crowded theater should not be construed as any kind of limitation on the freedom of
speech. Arbitrarily shouting "fire" constitutes a violation of the property
rights of the theater owner and of the other ticket holders, whom it prevents from using
their property as they wish. When one holds the context of the rational concept of
freedom, it becomes clear that it is no more a violation of freedom of speech to prohibit
such speech, than it is to prohibit the speech of disruptive hecklers, or the speech of an
uninvited guest who might choose to deliver a harangue in one's living room. Violations of
freedom of speech occur only when the speaker has the consent of the property owners
involved and then is prohibited from speaking by means of the initiation of physical
forcein particular, by the government or by private individuals acting with the
sanction of the government.

Because of the confusions that have been introduced into
the concept of freedom, it is necessary to set matters right in a number of important
concrete instances. Thus, freedom of speech is violated not when an individual does not
receive an invitation to speak somewhere, but when he does receive it and is
stopped by the government (or by private individuals acting with the sanction of the
government) from accepting the invitation or exercising it. It is violated precisely by
Communist and socialist disrupters whom the police refuse to remove. Ironically, in the
case of a live theatrical performance, it is violated precisely when someone arbitrarily
shouts "fire." Such a person violates the freedom of speech of the actors on
stage.

The freedom of the press is violated and censorship exists
not when a newspaper refuses to publish a story or a column that, for any reason, it
regards as unworthy of publication, but when it is prepared to publish a piece and is
stopped from doing so by the government. Thus, if I want to print my views in The New
York Times, but can neither afford the advertising rates nor persuade the publisher to
give me space, my freedom of the press is not violated; I am not a victim of
"censorship." But suppose I do have the money to pay the advertising rates or
could persuade the publisher to print my views, and the government disallows itthat
would be a violation of the freedom of the press; that would be censorship. It is a
violation of my freedom of the press if the government stops me from mimeographing
leaflets, if that is all I can afford to do to spread my ideas. Again, censorship exists
not when the sponsor of a television program refuses to pay for the broadcast of ideas he
considers false and vicious, but when he does approve of the ideas he is asked to sponsor
and yet is stopped from sponsoring themfor example, by an implicit threat of the
government not to renew the license of the television station, or arbitrarily to deny him
some permission he requires in some important aspect of his business.28

In the same way, if I ask a woman to marry me, and she
says no, my freedom is not violated. It is only violated if she says yes, and the
government then stops me from marrying hersay, by virtue of a law concerning
marriages among people of different races, religions, or blood types. Or, finally, if I
want to travel somewhere, but lack the ability to pay the cost of doing so, my freedom of
travel is in no way violated. But suppose I do have the ability to pay the cost, and want
to pay it, but the government stops mesay, with a wall around my city (as existed
until recently in East Berlin), a passport restriction, or a price control on oil and oil
products that creates a shortage of gasoline and aviation fuel and thus stops me from
driving and the airlines from flyingthen my freedom of travel is violated.

What is essential in all these cases is not the fact that
there is something I cannot do for one reason or another, but what it is, specifically,
that stops me. Only if what stops me is the initiation of physical forceby the
government in particularis my freedom violated.

Subsequent discussions in this book will unmask the
influence of the anarchic concept of freedom in the distortions that have taken place in
connection with the antitrust lawsin the concepts of freedom of competition and
freedom of entry, and in the related notions of private monopoly and private price
control. They will also deal with the distortions to be found in the present-day notion of
the "right to medical care."29

Here it must be pointed out that application of the
anarchic concept of freedom operates as a cover for the violation of genuine freedom. If,
for example, having to work for a capitalist, as a condition of earning wages and being
able to live, is a violation of freedom and represents the existence of "wage
slavery," as the Marxists call it, then it appears that when the Communists murder
the capitalists, they are merely retaliating against the aggression of
capitalistsindeed, of slave owners.30 Similarly, if, as the anarchic
concept of freedom claims, freedom of travel or movement requires the ability to be able to
afford to travel or move, then a state's requirement of a year's residency, say, as the
condition of receiving welfare payments, can be construed as a violation of the freedom of
travel or movement. Maintenance of such alleged freedom of travel or movement then
requires the continued corresponding enslavement of the taxpayers, who must pay to finance
it under threat of being imprisoned if they do not.

What is essential always to keep in mind is that since
freedomreal freedomis the absence of the initiation of physical force, every
attempt to justify any form of restriction or limitation on freedom is actually an
attempt, knowingly or unknowingly, to unleash the initiation of physical force. As such,
it is an attempt to unleash the destruction of human life and property, and for this
reason should be regarded as monstrously evil.

What makes the anarchic concept of freedom so destructive
is the fact that in divorcing freedom from the context of rationality, it not only seeks
to establish a freedom to initiate physical force, as in the cases of "wage
slavery" and the anarchic concept of the freedom of travel, but also, on the basis of
the consequences of such a perverted concept of freedom, provides seeming justification
for the violation of freedom as a matter of rational principle. For example, the anarchic
concept of freedom of speech, which claims that hecklers can speak at the same time as a
lecturer and thus prevent him from communicating his thoughts, not only serves to
legitimize the violation of the lecturer's freedom of speech but also, if accepted as
being a valid concept of freedom of speech, must ultimately doom the freedom of speech as
a matter of rational principle. For if freedom of speech actually entailed the
impossibility of communicating thought by speech, because hecklers could continually
interrupt the speaker, respect for rationalityfor the value of communicating
thoughtwould then require the denial of the freedom of speech.

Such a vicious absurdity arises only on the basis of the
anarchic concept of freedom. It does not arise on the basis of the rational concept of
freedom. Freedom of speech rationally means that the lecturer or invited speaker has the
right to speak and that hecklers and disrupters are violating the freedom of speech. The
rational concept of freedom establishes freedom of speech precisely as the safeguard of
the communication of thought, not its enemy. It is vital to keep this principle in
mind today in an environment in which many university campuses have been transformed into
virtual zoos, in which cowardly and ignorant administrators regularly tolerate disruptions
of speech by gangs of delinquents masquerading as students. Such university administrators
thereby abandon their responsibility to maintain their universities as the centers of
teaching and learning that in their nature they are supposed to be. In tolerating anarchic
violations of freedom of speech in the name of freedom of speech, they pave the way for
the outright fascistic destruction of freedom of speech in the name of rationality.

The
Decline of Freedom in the United States

In the twentieth century, freedom in the United States has
been in decline. A twofold measure of this decline is the fact that, with little if any
exaggeration, it is now the case that the average mugger has less to fear from the police
and courts than the average successful businessman or professional has to fear from the
Internal Revenue Service. In allowing common crime to go increasingly unchecked, the
government has increasingly failed in its function of securing the individual's freedom in
relation to other private individuals. At the same time, as the limits on its powers have
been removed, it has itself increasingly violated the freedom of the individual. The
government's energies and efforts have more and more been diverted from the protection of
the individual's freedom to the violation of it.

To some extent, the process of the destruction of freedom
has taken place under the code words of combatting "white-collar crime" instead
of "blue-collar crime." The latter type of crime is genuine crime, entailing the
initiation of physical force. The former type of crime incorporates some elements of
genuine crime, such as fraud and embezzlement, but consists mainly of fictitious
crimesthat is, perfectly proper activities of businessmen and capitalists which are
viewed as crimes from the perverted perspective of Marxism and other varieties of
socialism, such as charging prices that are allegedly "too high" or paying wages
that are allegedly "too low."

A profreedom political party would have as the essence of
its platform the replacement of the government's suppression of the activities of
businessmen and other peaceful private individuals with the rightful suppression of the
activities of common criminals, such as muggers, robbers, and murderers. Its essential
goal would be the total redirection of the energies of the government away from
interference with the peaceful, productive activities of the citizens to forcibly and
effectively combatting the destructive activities of common criminals.

The extent to which this can happen, and thus the future
of freedom in the United States, depends first of all on the concept of freedom being
properly understood, and then on its being upheld without compromise in every instance in
which freedom is violated or threatened, from the police turning their backs on campus
disruptions and even open rioting and looting in major cities, to income tax audits and
the ever growing array of government regulations.

All of the major problems now being experienced in the
United States have as an essential element the inconsistent application or outright
abandonment of the country's own magnificent original principle of a government upholding
individual freedom. Every violation of that principleevery act of government
intervention into the economic systemrepresents the use of physical force either to
prevent individuals from acting for their self-interest or to compel them to act against
their self-interest. It is no wonder that as the violations of freedom multiply, people
are less and less able to serve their self-interests and thus suffer more and more. In
order for the American people once again to succeed and prosper, it is essential for the
United States to return to its founding principle of individual freedom.

The
Growth of Corruption as the Result of the Decline of Freedom

Closely and necessarily accompanying the destruction of
freedom in the United States has been the growing corruption both of government officials
and of businessmen, who are increasingly under the power of the officials. The ability to
violate the freedom of businessmen gives to the government officials the power to deprive
businessmen of opportunities to earn wealth or to retain wealth they have already earned.
The power of the officials is fundamentally discretionary, that is, it may or may not be
used, as they decide. This is always the case with legislators contemplating the enactment
of new laws. It is often the case with officials charged with the execution of a
lawif they have the power to decide whether or not to enact this or that new
regulation in the course of its execution, and whether or not to apply the regulation in
any given case, or to what extent.

This situation inevitably creates an incentive on the part
of businessmen to bribe the officials, in order to avoid the passage of such laws or the
enactment or application of such regulations and thus to go on with the earning of wealth
or to keep the wealth they have already earned. It is a situation in which businessmen are
made to pay the officials for permissions to act when properly they should be able to act
by rightby the right to the pursuit of happiness, which includes the right to the
pursuit of profit.

At the same time, the government's ability to violate
freedom gives it the power to provide businessmen with subsidies and to damage their
competitors. This creates corruption of a much worse character, one in which businessmen
are led to offer bribes not to defend what is theirs by right, but as part of an act of
depriving others of what belongs to those others by right. Few businessmen are moral
philosophers, and those who may have begun their practice of bribing government officials
in order simply to avoid harm to themselves cannot be counted upon always to keep in mind
the distinction between an act of self-defense and an act of aggression, especially when
they must operate increasingly in the conditions of a virtual jungle, in which competitors
are prepared to use the government against them and in which large and growing numbers of
other businessmen are all too willing to gain subsidies at their expense. The result is a
powerful tendency toward the destruction of the whole moral fabric of business.

The obvious solution for this problem of corruption is, of
course, the restoration of the businessman's freedom and his security from the destructive
actions of the government officials. When the businessman can once again act for his
profit by right rather than permission, when the government has lost the power both to
harm him and to harm others for his benefit, the problem of such bribery and corruption
will shrivel to insignificance.31

3. Capitalism and the Origin of Economic Institutions

To the degree that they exist, freedom and the pursuit of
material self-interest, operating in a rational cultural environment, are the foundation
of all the other institutions of capitalism. And the study of these institutions and their
functioning is the substance of the science of economics.

If individuals both possess freedom and, at the same time,
rationally desire to improve their lives and well-being, then they have only to use their
minds to look at reality, consider the various opportunities that nature and the existence
of other people offer them for serving their self-interest, and choose to pursue whichever
of the opportunities confronting them they judge best. They can do whatever they judge is
most in their self-interest to do, provided only that they do not initiate the use of
force against others.

What people do in these circumstances is spontaneously to
set about establishing, or extending and reinforcing, all the other institutions, in
addition to freedom and limited government, that constitute a capitalist economic system,
such as private ownership of the means of production, saving and capital accumulation,
exchange and money, division of labor, and the price system.

Thus, in pursuing their rational self-interest under
freedom, they appropriate previously unowned land and natural resources from nature and
make them into private property and thus privately owned means of production. Private
property in products, including capital goods, then follows on the basis of private
property in land and natural resources: the owners of land and natural resources own the
products that result from them, including those which they use as means of further
production. In addition, of course, they can exchange their products with others for
services. These others then also own products, including capital goods, and can, of
course, obtain land and natural resources from their original owners by means of purchase
or, in primitive conditions, barter exchange.

Being secure in their possession of property from violent
appropriation by others, and rational enough to act on the basis of long-run
considerations, individuals save and accumulate capital, which increases their ability to
produce and consume in the future (for example, following the appropriation of land, they
clear trees, remove rocks, drain, irrigate, build, and do whatever else is necessary to
establish and improve farms and mines and, later on, commercial and industrial
enterprises).

They also perceive the advantages of establishing division
of labor and performing exchanges with others. They perceive that some individuals are
more efficient than others in the production of certain goods, whether by reason of
personal ability or because of the circumstances of the territory in which they live, and
that an advantage is to be gained by individuals concentrating on their areas of greater
efficiency and exchanging the results.32

They perceive the advantages of indirect
exchangethat is, of accepting goods not because they want them themselves, but
because others want them and the goods can thus be used as means of further exchanges. Out
of indirect exchange money develops, with the result that the division of labor is enabled
radically to intensifyto the point where each individual finds it to his interest to
produce or help to produce just one or at most a very few things, for which he is paid
money, which he in turn uses to buy from others virtually all that he himself consumes.33

In the context of a division-of-labor, monetary economy,
the individual's pursuit of his material self-interest gives rise to the narrower
principle of financial self-interestthat is, of preferring, other things being
equal, to buy at lower prices rather than higher prices and to sell at higher prices
rather than lower prices. These are the ways to increase the goods one can obtain by the
earning and spending of money. In combination they represent the profit motivethe
principle of "buying cheap and selling dear."

The individual's pursuit of self-interest also gives rise
to economic inequality, as those who are more intelligent and ambitious outstrip those who
are less intelligent and ambitious; and to economic competition, as different sellers seek
to sell to the same customers, and as different buyers seek to buy one and the same supply
of a good or service.

The combination of the profit motive and the freedom of
competition, in turn, constitutes the basis of the price system and all of its laws of
price determination.

Thus, rational self-interest and the individual's freedom
to act on the basis of it underlie private property and private ownership of the means of
production, saving and capital accumulation, the division of labor, exchange and money,
financial self-interest and the profit motive, economic inequality, economic competition,
and the price systemin a word, the whole range of capitalism's economic
institutions.

The combined effect of these institutions is economic
progressthat is, the increase in the productive power of human labor and the
consequent enjoyment of rising standards of living. Economic progress is the natural
accompaniment of rationality and the freedom to act on it. This is so because the
continued exercise of rationality creates a growing sum of scientific and technological
knowledge from generation to generation. This, together with the profit motive, the
freedom of competition, the incentive to save and accumulate capital, and the existence of
a division-of-labor society, is the essential basis of continuous economic progress.34

Economic progress is the leading manifestation of yet
another major institutional feature of capitalism: the harmony of the rational
self-interests of all men, in which the success of each promotes the well-being of
all. The basis of capitalism's harmony of interests is the combination of freedom and
rational self-interest operating in the context of the division of labor, which is itself
their institutional creation. Under freedom, no one may use force to obtain the
cooperation of others. He must obtain their cooperation voluntarily. To do this, he must
show them how cooperation with him is to their self-interest as well as his own, and,
indeed, is more to their self-interest than pursuing any of the other alternatives
that are open to them. To find customers or workers and suppliers, he must show how
dealing with him benefits them as well as him, and benefits them more than buying from
others or selling to others. As will be shown, the gains from the division of labor make
the existence of situations of mutual benefit omnipresent under capitalism.35
The division of labor, in combination with the rest of capitalism, represents a regular,
institutionalized arrangement whereby the mind of each in serving its individual
possessor, serves the well-being of a multitude of others, and is motivated and enabled to
serve their well-being better and better.

In sum, capitalism, with its economic progress and
prosperity, is the economic system of a free society. It is the economic system people
achieve if they have freedom and are rational enough to use it to benefit themselves. As I
have said, it represents a self-expanded power of human reason to serve human life.36

4.
Capitalism and the Economic History of the United States

The development of all the institutional features of
capitalism is well illustrated by the economic history of the United States. Of course,
the United States was by no means the perfect model of a capitalist country. Negro slavery
existed, which denied all freedom to blacks and prevented them from pursuing their
material self-interests. This was in total contradiction of the principles of capitalism.
And other important contradictions existed as well, such as a policy of protective
tariffs, public canal and turnpike building, the government's claim to ownership of the
western lands and its consequent ability to use land grants to subsidize uneconomic
railroad building, and, very important, the government's promotion of the use of debt as
backing for paper money, which repeatedly resulted in financial panics and depressions
when substantial debtors failed, as, in the nature of the case, they had to.37

Nevertheless, the history of the United States shows a
government committed in principle to upholding the freedom of the individual and, for the
white population, doing so in fact to a degree never achieved before or since. And thus,
following the establishment of the United States, we observe a century-long process of the
appropriation of land and establishment of private property and private ownership of the
means of production, as people were made free to appropriate previously ownerless
territory and moved west to do so. This period represents the most important historical
example of the process of establishing private property and private ownership of the means
of production described in the preceding section. By and large, the settlers simply moved
into what was virtually an empty continent and made major portions of it into private
property by direct appropriation from nature. The private property that exists today in
the United States can generally be traced back, through intervening purchases and sales,
to such original appropriations from nature.38

The history of the United States was also characterized by
the rapid development of the division of labor and the growth of a monetary economy. The
largely self-sufficient pioneers of colonial times were succeeded by farmers producing
more and more for the market and buying goods in the market, including all manner of
equipment and other aids that greatly increased their ability to produce. The result of
the rising productivity of labor in agriculture was a steady shift in population away from
farming and toward towns and cities, which sprang up in the wilderness and grew rapidly as
centers of an ever more prosperous commerce and industry.

The growing concentration of farmers on producing for the
market and the movement of more and more of their sons and daughters to the towns and
cities to find employment constituted the actual building of a division-of-labor society.
This was a process that was dictated by considerations of self-interest on the part of
millions of individual people. Each individual farmer who devoted his labor to producing
crops for the market did so because he judged that he would be better off with the
products he could buy with the money he earned than he would be with the products he could
produce for himself with the same labor. Each individual son or daughter of a farmer who
moved to a town or city to find employment did so because he judged that he would be
better off by doing sothat the income to be earned in a town or city exceeded the
income to be made as a farmer and any allowance for the self-produced goods and other
benefits associated with living on a farm. Thus, the self-interested actions of millions
of individuals is what created a division-of-labor society in the United States and
everywhere else that it exists.

The security of property made the American people both
industrious and provident, because they knew that they could keep all that they earned and
be able to benefit from all that they saved. (There was no income tax prior to 1913.) Not
surprisingly, they were considered to be the hardest-working people in the world. And
their consequent high rate of saving ensured that each year a substantial proportion of
their production took the form of new and additional capital goods, which had the effect
of increasing their ability to produce and consume in succeeding years.

The freedom of production in the United States led to an
unprecedented outpouring of innovationsto the steady introduction of new and
previously unheard of products and to the constant improvement of methods of production.
This, along with the constant availability of an adequate supply of savings to implement
the advances, produced the most rapid and sustained rate of economic progress in the
history of the world.39

In the process, some individuals achieved enormous
personal wealth and distinction. But their success was not the cause of anyone else's
impoverishment. It was, on the contrary, precisely the means whereby the general standard
of living was raised and all were progressively enriched. For these individuals made the
innovations and built the industries that were the source of the growing volume of goods
enjoyed by all.

And, overall, guiding the entire process of production in
the American economy were the profit motive and the price system. The "dollar-chasing
Americans," as they were called, were vitally concerned with earning money.
Calculations of profit and loss governed every business decision and, therefore,
practically every decision concerning the production of goods and services. Because of the
freedom of competition, those business firms succeeded which found ways to reduce their
costs of production and offer better goods at lower pricesearning high profits by
virtue of low costs and large volume.

The economic history of the United States can be
understood on the basis of a single fundamental principle: people were free and they
used their freedom to benefit themselves. Each individual was free to benefit himself,
and the necessity of respecting the freedom of others necessitated that he benefit them as
well if he was to have them as workers, suppliers, or customers. Because people had the
freedom and the desire to benefit themselves, they went ahead and virtually all of them
actually succeeded in benefitting themselves.

In 1776 the present territory of the United States was an
almost empty continent, whose cities either did not exist or were little more than coastal
villages. Its population consisted of approximately half a million Indians, who lived on
the edge of starvation, and three million settlers, most of whom were semi-self-sufficient
farmers living in extreme poverty. In less than two centuries, it was transformed into a
continent containing the two hundred million richest people in the history of the world; a
continent crisscrossed with highways, railways, telephone and telegraph lines; a continent
filled with prosperous farms and dotted with innumerable towns and cities that were the
sites of factories using methods of production and producing all manner of goods that
probably could not even have been imagined in 1776.

One should ask how the United States' economy got from
where it was then to where it is even now. One should ask how Pittsburgh, Cleveland,
Detroit, Chicago, St. Louis, San Francisco, Los Angeles, Houston, and Dallas came to be
the great cities they all were, not very long ago, and, for the most part, still are. One
should ask how New York City grew from a population of twenty thousand to eight million,
and how Boston and Philadelphia could increase in size thirty-five and one hundred times
over. One should ask where all the means of transportation and communication, all the
farms and factories, houses and stores, and all the incredible goods that fill them came
from.

The answer, as I say, is astoundingly simple. What was
achieved in the United States was the cumulative, aggregate result of tens of millions
of people, generation after generation, each pursuing his individual self-interestin
the process, necessarily helping others to achieve their self-interests. And what made
this possible was individual freedom.

Thus, eastern farmers realized that the land in the
Midwest and West was better for many purposes than the land in the East, and that a higher
income was to be made by moving there. And so they moved. Merchants realized that these
farmers needed supplies and that money was to be made in supplying them. And so they
opened clusters of stores and built their houses at supply points in proximity to the
farmers, thus laying the base of towns and cities. They made money and expanded their
operations. Others perceived the growing trade and the money to be made in improving
transportation to the new regions. They built barge lines and stagecoach lines, then
steamship companies and railroads, and made money.

Businessmen and inventors, often one and the same, were
constantly on the lookout for the new and the better. They discovered and introduced
thousands upon thousands of improvements both in products and in methods of production,
with each new advance serving as the base for something still newer and still better.
These businessmen and inventors built the factories and the industries that made the
cities and towns. The rest of the population, always on the lookout for better jobs,
recognized the advantages of employment in the new industries and the new cities and so
took the ever improving, ever better-paying jobs they offered.

All this happened because it was to the rational
self-interest of individuals to make it happen and because no one could use force to stop
them from making it happen. The British had tried to prevent the development of the
territory west of the Appalachian Mountainsto set it aside as a kind of gigantic
wildlife preserve, so to speakbut the American Revolution overthrew their rule and
cleared the way for the unprecedented economic progress I have described.

The rising prosperity of each generation brought about a
continual doubling and redoubling of the population, as a higher and higher proportion of
children survived to adulthood, and as an ever growing flood of immigrants bought,
borrowed, and sometimes stole their way to the shores of whatin their awe and
admiration for the United States and its freedomthey called "God's
country."

* * *

In recent years, it is true, the economic glow of the
United States has lost much of its luster. While advances continue in some fields, such as
computerization, major areas of economic life, and the economic conditions confronting
large numbers of people, have clearly fallen into a state of decline. Major industries,
such as automobiles and steel, and entire industrial regionsthe Northeast and the
Midwest, once the backbone of the American economyare in decline. What was once the
industrial heartland of the United States is now known as the rust belta
dreadful, but accurate description of its condition. Detroit, once the home of the
American automobile industry and the leading industrial city in the world is now on the
verge of losing its last automobile factory, and growing portions of it are becoming
uninhabited. The housing stock, industry, and downtown shopping districts of many other
large cities are also in a state of profound decay. For some years, homeownership has been
beyond the reach of most people, and a sharp rise in the price of electricity, heating
oil, and gasoline has made the operation of homes and automobiles far more costly and has
undercut people's ability to afford other goods. The supply of power plants is becoming
inadequate. A growing number of bridges, highways, and commercial aircraft are in need of
major overhaul or replacement. Large-scale unemployment persists.

This book makes clear that the cause of such problems is
the progressive abandonment of capitalism and the undermining of its institutions over a
period of several generations. This is a process that has finally assumed dimensions so
great as to jeopardize the continued functioning of the economic system.

There has been a steady increase in government spending
for alleged social welfare, which has been financed by a system of progressive income and
inheritance taxation and by budget deficits and inflation of the money supply. These
policies, in turn, destroy incentives to produce and the ability to save and accumulate
capital. They have been coupled with a steadily increasing burden of government
regulations restricting or prohibiting economically necessary activities and encouraging
or compelling unnecessary, wasteful, and even absurd activities. For example, the
production of fuel has been restricted or even prohibited by price controls and so-called
environmental legislation, while the hiring and promotion of unqualified employees has
been encouraged and even compelled under systems of government imposed racial and sexual
quotas.

The consequence of all of this has been growing economic
stagnation, if not outright economic decline, a situation punctuated by rapidly rising
prices, growing unemployment, and sporadic shortages.

In recent years, it appears that there has been some
recognition of the nature of our problems. Unfortunately, the recognition does not yet go
deep enough nor is it yet nearly widespread enough. Thus its benefits are likely to prove
elusive or at least extremely short-lived. For example, a major undermining of the OPEC
cartel and partial retracement of the price of oil took place in the 1980s, mainly as a
result of the repeal of price controls on oil and the easing of "environmental"
regulations early in the decade. But now this improvement is in the process of being
reversed, through the reimposition and further extension of "environmental"
regulations. At the same time, other forms of government interference and government
spending continue to grow, and federal budget deficits continue at an alarming level,
which makes it likely that the government will turn either to destructive tax increases or
to a no less destructive acceleration of inflation. Even the sudden collapse of socialism
in Eastern Europe and the former Soviet Union provide little cause for long-term optimism
about the economic system of the United States. This is because, as will be explained
later, all the essentials of socialism live on in the ecology movement, and are enjoying
growing influence in the United States even while socialism in the form of Marxism is in
decline in most of the world.40

5. Why
Economics and Capitalism Are Controversial

In propounding sound economic theory and thus in
presenting the case for capitalism, this book cannot avoid being highly controversial. It
is necessary to explain the reasons.

The
Assault on Economic Activity and Capitalism

Virtually every aspect of capitalism and thus of economic
activity is savagely denounced by large segments of public opinion. The pursuit of
self-interest is condemned as evil, and of material self-interest as "vulgar"
besides. Freedom under capitalism is ridiculed as "the freedom to starve" and as
"wage slavery." Private property is condemned as theftfrom a patrimony
allegedly given by God or Nature to the human race as a whole. Money is denounced as the
"root of all evil"; and the division of labor, as the cause of one-sided
development, narrowness, and "alienation."

The profit motive is attacked as the cause of starvation
wages, exhausting hours, sweatshops, and child labor; and of monopolies, inflation,
depressions, wars, imperialism, and racism. It is also blamed for poisoned foods,
dangerous drugs and automobiles, unsafe buildings and work places, "planned
obsolescence," pornography, prostitution, alcoholism, narcotics abuse, and crime.
Saving is condemned as hoarding; competition, as "the law of the jungle"; and
economic inequality, as the basis of "class warfare." The price system and the
harmony of interests are almost completely unheard of, while economic progress is held to
be a "ravaging of the planet," and, in the form of improvements in efficiency, a
cause of unemployment and depressions. At the same time, by the same logic, wars and
destruction are regarded as necessary to prevent unemployment under capitalism.

Virtually all economic activity beyond that of manual
labor employed in the direct production of goods is widely perceived as parasitical. Thus
businessmen and capitalists are denounced as recipients of "unearned income,"
and as "exploiters." The stock and commodity markets are denounced as
"gambling casinos"; retailers and wholesalers, as "middlemen," having
no function but that of adding "markups" to the prices charged by farmers and
manufacturers; and advertisers, as inherently guilty of fraudthe fraud of attempting
to induce people to desire the goods that capitalism showers on them, but that they
allegedly have no natural or legitimate basis for desiring.

Despite the obvious self-contradictions, capitalism is
simultaneously denounced for impoverishing the masses and for providing them with
"affluence," for being a rigid class society and for being dominated by the
upstart nouveau riche, for its competition and for its lack of competition, for its
militarism and for its pacifism, for its atheism and for its support of religion, for its
oppression of women and for its destruction of the family by making women financially
independent.

Overall, capitalism is denounced as "an anarchy of
production," a chaos ruled by "exploiters," "robber barons," and
"profiteers," who "coldly," "calculatingly,"
"heartlessly," and "greedily" consume the efforts and destroy the
lives of the broad masses of average, innocent people.

On the basis of all these mistaken beliefs, people turn to
the government: for "social justice"; for protection and aid, in the form of
labor and social legislation; for reason and order, in the form of government
"planning." They demand and for the most part have long ago obtained:
progressive income and inheritance taxation; minimum-wage and maximum-hours laws; laws
giving special privileges and immunities to labor unions; antitrust legislation; social
security legislation; public education; public housing; socialized medicine; nationalized
or municipalized post offices, utilities, railroads, subways, and bus lines; subsidies for
farmers, shippers, manufacturers, borrowers, lenders, the unemployed, students, tenants,
and the needy and allegedly needy of every description. They have demanded and obtained
food and drug regulations, building codes and zoning laws, occupational health and safety
legislation, and more. They have demanded and obtained the creation of additional money,
and the abolition of every vestige of the gold standardto make possible the
inflation of the money supply without limit. They have demanded this last in the belief
that the additional spending the additional money makes possible is the means of
maintaining or achieving full employment, and in the belief that creating money is a means
of creating capital for lending and thus of reducing interest rates. The ability to create
money has also been demanded because it is vital in enabling additional government
expenditures to be financed by means of budget deficits and thus in fostering the delusion
that the government can provide benefits for which the citizens do not pay. And when, as is
inevitable, the policy of inflation results in rising prices, capital decumulation, and
the destruction of credit, people demand price and wage controls, and then, in response to
the shortages and chaos that result, the government's total control over the economic
system, in the form of rationing and allocations.

In the face of such ideas and demands, which have swept
over the country with the force of a great flood, traditional American values of
individual rights and limited government have appeared trivial and
antiquatedappropriate perhaps to an age of independent farmers, but by no means to
be permitted to stand in the way of what a frightened and angry mass of people perceive as
the requirements virtually of their self-preservation. Indeed, so complete has been the
destruction of traditional American values, that the concept of individual rights has
itself been made over into a vehicle serving demands for government subsidies and
extensions of government powerin such forms as the assertion of "rights"
to jobs, housing, education, pensions, medical care, and so on.

This book flies in the face of all such anticapitalistic
ideas and demands. Its thesis implies that never have so many people been so ignorant and
confused about a subject so important, as most people now are about economics and
capitalism. It shows that in its logically consistent form of laissez-faire
capitalismthat is, with the powers of government limited to those of national
defense and the administration of justicecapitalism is a system of economic progress
and prosperity for all, and is a precondition of world peace.

The
Prevailing Prescientific Worldview in the Realm of Economics

There are a number of mutually reinforcing reasons for the
prevailing mass of errors about economics and capitalism.

First, even though this is the late twentieth century, it
is no exaggeration to say that in the realm of economics, the thought of most people
continues to bear the essential characteristics of the mentality of the Dark Ages or of
primitive peoples in general. What I mean by this is that prior to the development of a
scientific worldview in the Renaissance, it was common for people even in Western Europe
to interpret natural phenomena as the result of the operation of good or evil spirits.
Thus, if a flood came and washed away their huts, or if their animals died of disease,
polytheistic primitive peoples would think the explanation lay in the anger of a river god
or some other deity. Similarly, the supposedly monotheistic Europeans of the Dark Ages
would believe the explanation lay in the curse of some witch or other evil spirit. Both
believed that their protection from such harm lay in securing the aid of a more powerful
benevolent spirit, whether another deity or an angel, or simply the one and only deity.
What was essential was that they believed that their harm resulted from the exercise of
arbitrary power by evil forces and that their security depended on obtaining the aid of a
greater, stronger arbitrary power who would act on their behalf.

As the preceding discussion of the assault on economic
activity and capitalism should make clear, this is precisely the worldview people continue
to apply in the present day in the realm of economics. Again and again they view their
economic harm as caused by the ill will of an arbitrary powerabove all, "big
business." And they believe that their protection depends on the good will of a
bigger, tougher, stronger arbitrary powernamely, the governmentwhich will act
on their behalf. If, for example, the level of wages or prices or the quantity or quality
of housing, medical care, education, or anything else is not to people's satisfaction, the
explanation, they believe, is that evil businessmen are responsible. The solution, they
believe, is for the government, which is more powerful than the businessmen, to use its
greater power on behalf of the people.41

In contrast, the view of the economic world imparted by
economic science is as far removed from that of the primitive mentality as is the view of
the physical world that is imparted by the sciences of physics and chemistry. The
worldview imparted by economics is, like that of physics and chemistry, one of operation
according to natural laws which can be grasped by human intelligence. The domain of the
natural laws of economics is, of course, that of the rationally self-interested actions of
individuals insofar as they take place under freedom and center on the production of
wealth under a division of labor.

This scientific view of economic phenomena, even though in
existence since the late eighteenth century in the writings of the Physiocrats and the
early British classical economists, has been prevented from replacing the primitive
worldview. It has been prevented by the combined operation of the factors explained in the
remainder of this section.

Economics
Versus Unscientific Personal Observations

Everyone is a participant in economic activity and as such
develops or accepts opinions about economic life that seem consistent with his own
observations of it. Yet those opinions are often mistaken, because they rest on too narrow
a range of experience, which renders them inconsistent with other aspects of experience of
the same subject. Examples of this phenomenon in the everyday world of physical reality
are such naive beliefs as that sticks bend in water, that the earth is flat, and that the
sun revolves around the earth. In contrast with such naïveté, a scientific process of
thought seeks to develop the theory of a subject based on logical consistency with all
the valid observations pertaining to it. Thus, the visual appearance of sticks being bent
in water is reconciled with the fact that they continue to feel straight when subjected to
touch; the reconciliation being by knowledge of the refraction of light caused by water.
The earth's appearance of flatness is reconciled with such observations as the masts of
ships first becoming visible on the horizon by knowledge of the very gradual curvature of
the earth. The appearance of the sun's revolution about the earth is reconciled with
knowledge of the sun's relationship to other observable heavenly bodies through knowledge
of the earth's rotation about its axis.

Economics suffers from an apparent conflict between
personal observation and scientific truth probably to a greater extent than most other
sciences. This is because of the very nature of the system of division of labor and
monetary exchange. Every participant in the economic system is a specialist, aware of the
effect of things on his own specialization. As a rule, he does not stop to consider their
effect on other specializations as well; nor, as a rule, does he consider what their
longer-run effect on him might be were he to change his specialization. As a result of
this, people have come to believe such things as that improvements in production, which
can in fact necessitate the shrinkage or total disappearance of employment in any
particular branch of the division of labor, are economically harmful. By the same token,
they have come to believe that acts of destruction, which can in fact result in an
expansion of employment in particular branches of the division of labor, are economically
beneficial.42

Closely related to the failure to look beyond one's own
current specialization is the widespread confusion between money and wealth. In a
division-of-labor economy everyone is naturally interested in earning money and comes to
measure his economic well-being by the amount of money he earns. Thus, it is extremely
easy for people to conclude that anything that enables the average person to earn more
money is desirable, while anything that results in the average person's earning less money
is undesirable. It takes a scientific analysis to show that while each individual is
always economically best off earning as much money as the freedom of competition allows
him to earn, people are not economically better off when average earnings increase as
the result of government policies of creating money, or because the government violates
the freedom of competition. Indeed, economics shows that lower monetary earnings without
money creation and without violations of the freedom of competition represent a higher
actual standard of living than do higher monetary earnings with them.43 Along
these lines, there are important cases in which, even in the absence of money creation, it
turns out that a lower "national income" or "gross national product"
signifies a more rapid rate of increase in the production of wealth and improvement in
human well-being than does a higher "national income" or "gross national
product."44

Economics
Versus Altruism

If economics merely contradicted people's unscientific
conclusions based on their personal observations, its path would be difficult enough. Its
problems are enormously compounded, however, by the fact that its teachings also
contradict some of the most deeply cherished moral and ethical doctrines, above all, the
doctrine that the pursuit of self-interest by the individual is harmful to the interests
of others and thus that it is the individual's obligation to practice altruism and
self-sacrifice.

Economics as a science studies the rational pursuit of
material self-interest, to which it traces the existence of all vital economic
institutions and thus of material civilization itself, and from which it derives an entire
body of economic laws. It cannot help concluding that rational self-interest and the
profit motive are profoundly benevolent forces, serving human life and well-being in every
respect, and that they should be given perfect freedom in which to operate. Nevertheless,
traditional morality regards self-interest as amoral at best, and, indeed, as positively
immoral. It considers love of others and self-sacrifice for the sake of others to be man's
highest virtues, around which he should build his life.

Thus, the teachings of economics are widely perceived as a
threat to morality. And, by the same token, the anticapitalistic slogans described earlier
in this section are perceived as expressions of justified moral outrage. As a result,
economics must make its way not merely against ignorance, but against ignorance supported
by moral fervor and self-righteousness. Without the issue being named, economists are in a
similar position to the old astronomers, whose knowledge that the earth revolved about the
sun not only appeared to contradict what everyone could see for himself but also stood as
a challenge to the entire theological view of the universe. Economics and capitalism are a
comparable challenge to the morality of altruism.

* * *

It is almost certain that economics and capitalism will be
unable to gain sufficient cultural acceptance to ensure the influence of the one and the
survival of the other until there is a radical change in people's ideas concerning
morality and ethics, and that this change will have to be effected in fields other than
economicsnotably, philosophy and psychology. But even so, economics itself has an
enormous contribution to make in changing people's ideas on these subjects, which every
advocate of rational self-interest would be well advised to utilize.

A major reason for the condemnation of self-interest is,
certainly, beliefs about its economic consequences. If people did not believe, for
example, that one man's gain is another's loss, but, on the contrary, that in a capitalist
society one man's gain is actually other men's gain, their fear and hatred of
self-interest could probably not be maintained. Yet precisely this is what economics
proves. It proves what is actually the simplest thing in the world. Namely, that if
individuals rationally seek to do good for themselves, each of them can in fact achieve
his good. It proves that in a division-of-labor, capitalist society, in the very nature of
the process, in seeking his own good, the individual promotes the good of others, whose
self-interested actions likewise promote the achievement of his good. Economics proves the
existence of a harmony of the rational self-interests of all participants in the economic
systema harmony which permeates the institutions of private ownership of the means
of production, economic inequality, and economic competition. At the same time, it shows
that the fear of self-interest and the consequent prohibition of its pursuit is the one
great cause of paralysis and stagnationthat if individuals are prohibited from doing
good for themselves, their good simply cannot be achieved.

Economics
Versus Irrational Self-Interest

The teachings of economics encounter opposition not only
from the supporters of altruism, but also from the practitioners of an irrational,
short-sighted, self-defeating form of self-interest, as well. These are, above all, the
businessmen and wage earners whose short-run interests would be harmed by the free
competition of capitalism and are protected or positively promoted by policies of
government intervention, and who do not scruple to seek government intervention. For
example, the businessmen and wage earners who seek government subsidies, price supports,
tariffs, licensing laws, exclusive government franchises, labor-union privileges,
immigration quotas, and the like.

Such businessmen and wage earners form themselves into
pressure groups and lobbies, and seek to profit at the expense of the rest of the public.
They and their spokesmen unscrupulously exploit the economic ignorance of the majority of
people by appealing to popular misconceptions and using them in support of destructive
policies. Their action is self-defeating in that the success of each group in achieving
the privileges it wants imposes losses on other groups that are greater than its gains; at
the same time, its gains are canceled by the success of other groups in obtaining the
special privileges they want. The net effect is losses for virtually everyone. For not
only does each group plunder others and in turn is plundered by them, but, in the process,
the overall total of what is produced is more and more diminished, as well.

For example, what farmers gain in subsidies they lose in
tariffs, higher prices because of monopoly labor unions, higher taxes for welfare-type
spending, and so on. Indeed, the gains of each type of farmer are even canceled in part by
the gains of other types of farmersfor example, the gains of wheat farmers are lost
in part in paying higher prices for other subsidized farm products, like cotton, tobacco,
milk, and butter. In the same way, the benefit of the higher wages secured by a labor
union is lost in the payment of higher prices for products produced by the members of all
other unions, as well as in the payment of higher prices caused by subsidies, tariffs, and
so on. The net effect works out to be that less of virtually everything is produced,
because such policies both reduce the efficiency of production and prevent people from
being employed. Virtually everyone is made worse offthose who become unemployed and
those who continue to work. Because of the inefficiencies introduced, the latter must pay
prices that are increased to a greater degree than their incomes, and they must also use
part of their incomes to support the unemployed.

The pressure-group members may subjectively believe that
they are pursuing their self-interests. The supporters of altruism and socialism may
believe that the absurd process of mutual plunder carried on by such groups represents
capitalism and the profit motive. But the fact is that self-interest is not achieved by
pressure-group warfare. Nor is the activity of pressure groups a characteristic of
capitalism. On the contrary, it is the product of the "mixed economy"an
economy which remains capitalistic in its basic structure, but in which the government
stands ready to intervene by bestowing favors on some groups and imposing penalties on
others.

(As used in this book, the term "mixed economy"
is to be understood as what von Mises called a "hampered market economy." As he
explains, an economic system is either a market economy, in which case its operations are
determined by the initiative of private individuals motivated to make profits and avoid
losses, or a socialist economy, in which case its operations are determined by the
government. These two alternatives cannot be combined into an economy that would somehow
be a mixture of mutually exclusive possibilities. Thus, the term "mixed economy"
is to be understood in this book as denoting a hampered market economy.45)

In contrast, under genuine capitalismlaissez-faire
capitalismthe government has no favors to give and no arbitrary penalties to impose.
It thus has nothing to offer pressure groups and creates no basis for pressure groups
being formed out of considerations of self-defense.

The absurdity of the pressure-group mentality manifests
itself in the further fact that it provides powerful support for the fear and hatred of
self-interest emanating from altruism, and thus leads to the suppression of the pursuit of
self-interest. The practitioners of pressure-group warfare are in the contradictory
position of wanting to serve their own particular interests and yet, with good reason,
simultaneously having to fear and oppose the pursuit of self-interest by others, since
under pressure-group warfare, one man's gain actually is another's loss. The result is
that while people strive to achieve their self-interest in their capacity as members of
pressure groups, yet, in their capacity as citizens, they strive to create social
conditions in which the pursuit of self-interest of any kind becomes more and more
impossible. Because, given their mentality, they cannot help but regard the pursuit of
self-interest as antisocial and thus must oppose it for everyone else.

In these ways, the irrational pursuit of self-interest
represented by pressure group warfare actually represents people actively and powerfully
working against their self-interest.

* * *

The practitioners of pressure group-warfare condemn
economics because they do not understand itindeed, may have made themselves
incapable of understanding it. Their mental horizon is so narrow and confined that it does
not extend beyond what promotes or impairs their immediate self-interest in their present
investments and lines of work. They perceive the doctrines of economics entirely from that
perspective. Thus, a shoe manufacturer of this type, who could not withstand foreign
competition, hears economics' doctrine of free trade from no other perspective than that,
if implemented, it would put him out of the shoe business. And thus he concludes that he
has a self-interest in opposing the doctrine of free trade. And, for similar reasons,
virtually every other doctrine of economics is opposed by the pressure groups concerned.
To use the analogy to astronomy once more, it is as though people mistakenly concluded not
only that the sun circled the earth and that morality itself supported the proposition,
but also that their personal well-being required them to oppose any alternative
explanation.

Economics
Versus Irrationalism

The preceding discussion points to the most fundamental
and serious difficulty economics encounters, which is a growing antipathy to reason and
logic as such. Economics presupposes a willingness of the individual to open his mind to a
view of the entire economic system extending over a long period of time, and to follow
chains of deductive reasoning explaining the effects of things on all individuals and
groups within the system, both in the long run and in the short run.46 This
broadness of outlook that economics presupposes is, unfortunately, not often to be found
in today's society. Under the influence of irrationalist philosophy, people doubt their
ability to achieve understanding of fundamental and broad significance. They are unwilling
to pursue matters to first causes and to rely on logic to explain effects not immediately
evident.

In large part, people's reluctance to think has been the
result of a two-centuries-long attack on the reliability of human reason by a series of
philosophers from Immanuel Kant to Bertrand Russellan attack which began soon after
the birth of economic science. More than any other factor, this attack on the reliability
of reason has been responsible for the perpetuation of the mentality of primitive man in
the realm of economics.47

A leading consequence and manifestation of this attack has
been the appearance of a series of irrationalist writers, who have come to the fore in
field after field, and who have taken a positive delight in establishing the appearance of
paradox and in seeming to overturn all that reason and logic had previously been thought
to prove true beyond doubt. The most prominent figure of this type in economics is Keynes,
who held that "Pyramid-building, earthquakes, even wars may serve to increase wealth,
if the education of our statesmen on the principles of the classical economics stands in
the way of anything better."48 In other fields, renowned authorities
proclaim that parallel lines meet, that electrons can cross from one orbit of an atom to
another without traversing the interval in between, that an empty canvas or smears made by
monkeys is a work of art, and that the clatter of falling garbage pails or a moment of
silence is a work of music. And lest we should forget our recurrent example of the motion
of the earth around the sun, contemporary philosophers assert that one cannot even be
certain that the sun will rise tomorrowthat such a thing has no necessity, and will
just "probably" occur.

The ability of such views to gain prominence already
reflects an advanced state of philosophical corruption. Once established, they give the
realm of ideas the aura of a dishonest game, a game that serious people are unwilling to
play or to concern themselves with. At the same time, they open the floodgates to the
dishonest. In the realm of economics, the establishment of such views has enormously
encouraged the pressure groups and advocates of socialism, who have been enabled to
propound their opposition to the teachings of economics under the sanction of an allegedly
higher, more advanced "non-Euclidean economics." In addition, by depriving the
intellect of credibility and substituting sophistry for science, their establishment has
allowed demagogues to flourish as never before. The demagogues can count both on few
serious opponents and on audiences not willing or able to understand such opponents. Thus,
they have an open season in propounding all the absurd charges against capitalism that I
described earlier.

Economics by itself certainly cannot reverse this
epistemological current. Even more than in the case of ethics, that must come mainly from
within philosophy. But economics, or any other special science, can certainly make an
important contribution to that reversal by refuting the irrationalists within its own
domain and by establishing the principle that within its domain intelligible natural law
is, indeed, operative. In refuting the theories of Keynes and similar authors, it can show
that in economics there is no basis for the advocacy of irrational theories and that
reason prevails. This perhaps may help to set a pattern for the same kind of demonstration
in other fields.

Economics, moreover, is uniquely qualified to demolish the
apparent conflict between theory and practice which today's intellectuals experience in
connection with the undeniable failure of socialism and success of capitalism. The
overwhelming majority of today's intellectuals, it must be kept in mind, believe virtually
every point of the indictment of capitalism described earlier in this section. Thus, from
their perspective, socialism should have succeeded and capitalism have failed. They had to
expect that Soviet Russia, with its alleged rational economic planning and concentration
on the building up of heavy industry, should have achieved the kind of economic eminence
that Japan has achieved under capitalism, and have done so long ago. At the same time,
they had to expect that the United States and Western Europe should have fallen into
greater and greater chaos and poverty.

Yet, despite everything they believe, and think they
understand, socialism has failed, while capitalism has succeeded. Being unwilling to admit
that they have been wrong in their beliefsthoroughly, devastatingly wrongthey
choose to interpret the failure of socialism and success of capitalism as proof of the
impotence of the mind to grasp reality, and now turn en masse to supporting the ecology
movement and its assault on science and technology.49 In this way, ironically,
the failure of socialism and success of capitalism have played an important role in
accelerating the growth of irrationalism.

In presenting a correct theory of capitalism and
socialismthat is, in explaining why in reason capitalism must result in a rising
productivity of labor and improving standards of living, while socialism must culminate in
economic chaos and a totalitarian dictatorshipeconomics reunites theory and practice
in this vital area. It thereby reaffirms the power of the human mind and removes the
failure of socialism and success of capitalism as any kind of pretext for irrationalism.

6. Economics
and Capitalism: Science and Value

This is not a book on philosophy. It is not its purpose to
validate the philosophy of the Enlightenment with respect to the fundamental questions of
metaphysics, epistemology, or ethics. It simply takes for granted the reliability of
reason as a tool of knowledge and the consequent value of man and the human individual. It
leaves to philosophers the job of convincing those who do not share these convictions. Its
domain is merely the principles of economics and the demonstration that capitalism is the
system required for prosperity, progress, and peace.

Nevertheless, one philosophical question that must be
briefly addressed here is the assertion that science and value should be kept separate and
distinctan assertion that is often made by advocates of socialism and
interventionism when they are confronted with the advocacy of capitalism. This book
obviously flies in the face of that demand, for it consistently seeks to forge a union
between the science of economics and the value of capitalism.

Despite the prevailing view, this procedure is perfectly
sound. The notion that science and value should be divorced is utterly contradictory. It
itself expresses a value judgment in its very utterance. And it is not only
self-contradictory, but contradictory of the most cherished principles of science as well.
Science itself is built on a foundation of values that all scientists are logically
obliged to defend: values such as reason, observation, truth, honesty, integrity, and the
freedom of inquiry. In the absence of such values, there could be no science. The leading
historical illustration of the truth of these propositions is the case of Galileo and the
moral outrage which all lovers of science and truth must feel against those who sought to
silence him.

It is nonsense to argue that science should be divorced
from values. No one who makes this demand has ever been able consistently to practice it.
What it is proper to say is that science should be divorced from mere emotionthat
it must always be solidly grounded in observation and deduction. Irrational emotion should
not be confused with dedication to values, however.

The basis of the value of capitalism is ultimately the
same as the basis of the value of science, namely, human life and human reason. Capitalism
is the social system necessary to the well-being and survival of human beings and to their
life as rational beings. It is also necessary to the pursuit of scienceto the
pursuit of truth without fear of the initiation of physical force. These are all
demonstrable propositions. The advocacy of capitalism by economists, therefore, should be
no more remarkable, and no more grounds for objection, than the advocacy of health by
medical doctors.50

**George
Reisman is Professor of Economics at Pepperdine University's
Graziadio School of Business and Management.

Notes

1. For an account of the change that has taken place in
the definition of economics, see Israel M. Kirzner, The Economic Point of View (New
York: D. Van Nostrand, 1960).

2. I could also say that economics is the science which
studies the production of wealth under a system of division of labor and monetary
exchange, or under a system of division of labor and capitalism. (See below, p. 19,
the first two paragraphs of Part B of this chapter.) Both of these statements would be
correct, but they would also be redundant, because, as later discussion will show, a
system of division of labor presupposes both monetary exchange and all the other essential
institutions of a capitalist society. Finally, the expression goods and services could be
substituted for the word wealth. This too would yield a true statement about what
economics studies. But, as will be shown, a certain priority and emphasis must be given to
wealth as opposed to services.

3. Secondarily and peripherally to its study of the
production of wealth under a system of division of labor, economics also studies the
production of wealth under the absence of division of labor. It does so insofar as by so
doing it can develop its theorems under simplifying assumptions that will enable it to
shed light on the operations of a division-of-labor society, and insofar as by so doing it
can place the value of a division-of-labor society in its proper light, by contrasting it
with non-division-of-labor societies.

4. In the second century A.D., the Roman Empire extended
from Syria in the southeast to the northern border of present-day England in the
northwest. It circled the Mediterranean Sea, embracing Egypt and all of North Africa, and
included all of Europe west of the Rhine, as well as present-day Romania and Turkey and
all of Eastern Europe south of the Danube. Goods produced in the various regions of the
Empire were consumed throughout the Empire. For example, pottery made in Syria was
consumed as far away as England, and tin mined in England was consumed as far away as
Syria.

5. Because of its primary application to government
policy, it is understandable why the subject was originally known as political economy,
which was its name from the time of Adam Smith to the last quarter of the nineteenth
century, when the change to "economics" took place.

10. For elaboration, see below, pp. 42-49 and 542-559. 11.
See the writings of Ayn Rand for a consistent elaboration of the "benevolent universe
premise" across the entire range of human activity.

12. For a discussion of the ideas of Marx and Engels on
"alienation," see below, pp. 129-130.

13. See above, the discussion of mathematical economics on
pp. 8-9. See also below, pp. 58-61.

14. See Bernard Siegan, Economic Liberties and the
Constitution (Chicago: University of Chicago Press, 1980).

15. This section was inspired by and draws heavily on the
content of a lecture delivered by Dr. Leonard Peikoff in Chicago, in May 1980, under the
title "The Philosophic Basis of Capitalism," before the Inflation and Gold
Seminar of the US Paper Exchange/Tempor Corporation.

18. On these points, cf. Ayn Rand, "The Nature of
Government," in Ayn Rand, Virtue of Selfishness.

19. Cf. ibid.

20. In a fully consistent capitalist society, taxation
itself would be of a voluntary nature. On this subject see Ayn Rand, "Government
Financing in a Free Society," in Ayn Rand, Virtue of Selfishness.

21. Again, cf. Ayn Rand, "The Nature of
Government," in Virtue of Selfishness.

22. See below, pp. 343-371, 513-514, 542-594 passim, and
938-942.

23. It should be realized that even if much of the savings
individuals presently pay into the social security system were invested in housing, as
they likely would be, those savings would indirectly still contribute to investment in
factories and machinery. This is because savings would then not have to be withdrawn from
financing factories and machinery to financing housing, as is presently the case because
of the vast siphoning off of personal savings caused by the social security system.

24. The problem of the economic insecurity of prospective
social security recipients (and of everyone else) is compounded by the fact that an
inevitable accompaniment of the welfare state is fiat money, which makes all contractual
obligations stated in fixed sums of money essentially meaningless. On these points, see
below, pp. 925-926 and 930-931.

25. It should go without saying that the context taken for
granted in the reference to antipornography legislation is one in which all the parties
involved are freely consenting adults.

26. The following discussion is essentially an application
of principles set forth by Ayn Rand in criticizing the use of the word censorship
in reference to the actions of private individuals. Cf. Ayn Rand, "Man's
Rights," in Ayn Rand, Virtue of Selfishness, especially pp. 131-134.

27. Cf. ibid., pp. 128-130.

28. Ibid.

29. See below, pp. 375-387 and 238. The contrasting
meanings of the right to medical care are discussed on p. 380. Concerning this last
subject, see also George Reisman, The Real Right to Medical Care Versus Socialized
Medicine, a pamphlet (Laguna Hills, Calif.: The Jefferson School of Philosophy,
Economics, and Psychology, 1994).

30. For further discussion of the distortions introduced
into the concept of freedom of labor and present in the notion of "wage
slavery," see below, pp. 330-332.

32. Concerning the fact that the division of labor
originates on the basis of differences in human abilities and in the conditions of
people's natural surroundings, see von Mises, Socialism, pp. 292-293.

33. On the fact that money originates in the
self-interested actions of individuals, see Carl Menger, Principles of Economics
(Glencoe, Ill.: The Free Press, 1950), pp. 257-262. See also below, pp. 506-517.

34. These factors also operate to create a steadily
growing supply of useable, accessible natural resources. See below, pp. 63-67.

35. See below, pp. 123-133.

36. See above, p. 19.

37. See below, pp. 938-941.

38. In most of the world, unfortunately, the history of
private property is not so simple. Again and again, owners were forcibly dispossessed by
foreign invaders, by civil wars and revolutions, and by other expropriations carried out
by governments. Nevertheless, one of the things that later discussion will show is that
even where holdings of private property can be traced back to acts of force, the
operations of a capitalist society steadily wash away these stains. Once a few generations
have gone by, during which private property no longer passes by force, but by purchase,
the result is virtually the same as if it had never passed by force. For a discussion of
this point and also of the alleged injustices committed specifically against the American
Indians in the process of appropriating land in North America, see below, pp. 317-319. See
also Ludwig von Mises, Socialism, p. 504.

39. In the last generation, Japan, Taiwan, and South Korea
have achieved even more rapid rates of economic progress than the United States did in its
era of greatest progress. But the rapidity of their advance is largely the result of being
able to take advantage of the enormous heritage of innovations pioneered by and bequeathed
to them by the United States.

40. See below, pp. 99-106.

41. The leading manifestation of this worldview is the
Marxian exploitation theory and the "liberal" political agenda that rests on it.
See below, pp. 603-604.

42. The nature of these fallacies, along with most of
their leading manifestations, has been brilliantly dissected by Henry Hazlitt, Economics
in One Lesson, new ed. (New Rochelle, N. Y.: Arlington House Publishers, 1979), and by
Frederic Bastiat in his Economic Sophisms, trans. Arthur Goddard (New York: D. Van
Nostrand, 1964).

47. Among the most important and comprehensive writings on
the subject of irrationalism and its destructive influence are those of Ayn Rand,
virtually all of whose works shed profound light on it. See, for example, Atlas
Shrugged (New York: Random House, 1957) and the title essay in For the New
Intellectual (New York: Random House, 1961). See also the book of her leading
intellectual disciple Leonard Peikoff, The Ominous Parallels: The End of Freedom in
America (New York: Stein and Day, 1982). The works of von Mises also stress the
destructive influence of irrationalism in all matters pertaining to economics and
capitalism and are extremely valuable in this regard. See in particular, Human Action
and Socialism.